Old Problem with New Cryptocurrencies - Seriously? This Again?

in bitcoin •  2 years ago  (edited)


Some Old Problems Are Still Our New Problems!

Anyone who has been a cryptocurrency or Bitcoin enthusiast and entrepreneur for the last few years will have seen literally hundreds of cryptocurrencies come and go. Looking at the many that have fallen into the ditches of neglect, the garbage heap of bad ideas, and the dark back alley of greed, one will have seen failed cryptocurrencies created with design flaws that should have been avoided. One of these design flaws has continued to rear its ugly head, again and again and again; a large percentage of the total supply of currency controlled by the founders (Dev, investors, partners, etc...). We dealt with that issue a few years ago, and we're still dealing with it now. We can either do something about it, or we can stick our proverbial heads in a hole in a wall (see above image) and pretend this won't hurt the entire industry through massive media fallout and governmental oversight. Or, we can take action and do something about it this time.

Now, before we get into the depths of intrigue and hand-wringing, there are two specific terms that people who have been in cryptocurrency and Bitcoin for a while already know about... intimately. For those who already know about the "Pre-mine" and the "Pump and Dump," you can probably skip to the "Now The ICO... and Then What?" section below. For those who are not aware of those terms, I hope you enjoy reading a very simple description and their problems, because they are a cause and effect dynamic for which we have recently simply changed the cause. But the effect this time is much larger.

The Pre-mine

Back in the early days, when there was only a couple hundred cryptocurrencies, there was this thing called the pre-mine. This meant that in the initial "blocks" of the currency, a large percentage of existing coins/tokens were minted and sent to a wallet, or wallets, controlled by the founders of the currency. Meaning that they, the founders, actually had a large percentage of the currency actually in the marketplace at that time. This tended to lead to a sell-off some or all of their holdings as soon as the currency was of any value on the exchanges, as well as a more clever and greedy method of selling one's large holdings, something else called the "pump and dump. "

The Pump and Dump

the pump and dump is basically a process of artificially pumping up the price of the currency on the exchanges, and then dumping one's holdings on others while the price is high. Unfortunately the result of this was at least the sudden crash of the value of the coin, as well as a sudden disappearance of founder support or development. Again, this was and is a common problem as a result of people owning a large percentage of the total currency in circulation.

Well Meaning, or Greedy, or Both?

So, assume there are some cryptocurrencies that the founders make sure they have a good chunk of the currency in their control. It even seems like founders who mean well, and create a cryptocurrency that looks good and is of good value, realize at some point that they have a life-changing amount of money sitting in their control. Now, they can't help but find justification to cash out and cash in on all their hard work. Giving them a sudden great return of lots of money. Even giving them the benefit of the doubt and believing that they want to spend the money on further development, marketing, etc... with most of their holdings gone or shrinking quickly, there is now less monetary or competitive incentive to develop, support, and engage the community or the currency anymore. Every token they sell and dollar spend basically decreases the return on investment and increases the risk associated with the cost of doing business. Additionally, the dump drives the price of the currency down. Thus, currencies that had big percentages of the total money supply controlled by the founders should be viewed with extremely cautious consideration.

Now The ICO... and Then What?

It is interesting how popular the ICO suddenly became, and how the amount of money raised for new cryptocurrencies exploded. As Bitcoin has exploded, so has the overall cryptocurrency market. The pump and dump days of the pre-mine meant the majority of founders who dumped their holdings often made tens of thousands, and maybe sometimes a six figure payday. It appears that it was extremely very rare then for a dump to garner a million dollar payout for founders. More importantly, the losses for the miners and the traders back then was not substantial enough to garner legislative action or truly major media fallout.

Whether it's a large pre-mine, a huge genesis block sent to a developers wallet, an ICO where investors get 30% or more of the total currency, or something else, having a large percentage of the total amount of the currency in circulation in the hands of a few leaves too much room for profit takers, pump and dump schemes or and other dynamics not conducive to the positive growth of a new cryptocurrency. In general, when a lot of money is at risk, human nature can take a bad turn. It may be greed, or fear of loss and the potential reality of getting a big payday "for all my hard work." Simply put, opportunity for a life-changing influx of money is historically the foundation of some pretty sad choices. Allowing a large percentage of a currency to be in the hands of a few, has led to some very bad outcomes for the everyday working Jill and Joe. So, when a currency fails, whether the the founders of cryptocurrencies mean well, are greedy, or both, it doesn't really matter. The end result is a junk currency that cost a lot of good people a lot of hard earned money.

Now, when hundreds of ICOs have garnered hundreds of millions, even tens of billions of dollars in all, we will likely see a very bad fallout for losses of investor money. Are you skeptic of the fallout? Good. Skepticism is often healthy. Let's keep in mind that there have been hundreds of ICOs that have garnered billions of dollars in investment, Now, for those of you who were around in the early days, how many of the hundreds of cryptocurrencies new in 2015 are still around and of any pertinent value? Indeed, there are not many. In point of fact, hundreds have disappeared from the exchanges entirely. Most are gone or worthless. Now, imagine that same reality for the current influx of new cryptocurrencies. And now, it isn't thousands or tens of thousands of dollars at stake, it's billions! If past history is an indicator of future results, billions of dollars of investors' money will be lost. When that happens, what will be the fallout in the media and in the halls of governments world-wide?

The caution bells have already sounded, with some governments taking preemptive legislative action to stop ICOs. Yet the common practice of rewarding founders with huge chunks of a new cryptocurrency's total supply continues. While the global caution bells will continue to ring out, they will soon change into alarm sirens. The sirens of media who are tasked with the job of shining a bright light on businesses and movements that cost real people, everyday workers, honest citizens their hard earned retirement money. Yes, the caution bells are sounding, and we need not hide our heads in a hole in the wall.

What Should We Do?

One thought is to self-regulate; have the industry come together and develop new priciples for everyone to follow. Not necessarily laws (and regulations may be needed), but rather certifiable principles and qualifications, such as those found in many businesses today. Does the industry of cryptocurrency need to do a better job developing and demanding adherence to new principles? Many believe self-governance is a better option than government regulations. What do you think?

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Thoughtful post, well done. Self-regulation has not really worked in the current system (if it did, would we have the fed bailing out banks) nor in many other industries; however, distributed ledger may give way to a new and better way of self-regulation.

I would love to have a app that could regulate a new currency by allowing for an escrow-type mechanism to dispense founder payouts based on equations to ensure no founder or group of founder/investors could individually or collectively control enough currency to negatively influence the value of the currency in the marketplace. Does that sound like a decentralized app that others could use to self-regulate in a new and better way?

That sounds very promising indeed.

I love the idea of using accepted rules of behavior rather than laws. I think that's where the world is headed, eventually. We can persuade people to act ethically with social opprobrium rather than physical compulsion.

Perhaps the "persuasion" could be apps (DAOs) that could regulate a currency based on economic equations. A kind of decentralized fiat mechanism, where artificial intelligence could test and verify changes to the equations as a cryptocurrency becomes more useful and integrated into the global economy. Hmmm.

I'm with you on everything about that but the fiat part. Could it not be done with real money?

Sorry, I may be using the term "fiat" wrong. Financial Times defines fiat, in part, as "Fiat money is an intrinsically worthless object, such as paper money, that is deemed to be money by law." I was not talking about lawfully enforced paper money. Rather, I meant to say a decentralized "managed currency" mechanism. Does that help clarify, or am I not understanding your question?

get as many bitcoins as possible is the ultimate goal

I am beginning to follow you :)